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Trade unions, collective bargaining, and the labor market

A trade (or labor) union is a group of workers who have formed to protect their professional rights and interests, e.g. negotiating higher wages, heath care, pensions, workplace safety, and upholding the reputation of their trade.

Low coverage and greater fragmentation can limit
the benefits of trade unions

Countries with strong industrial relations
institutions and well-established social dialogue often perform well in
terms of economic growth and social cohesion. The weak and fragmented
bargaining and low levels of union coverage in Central and Eastern Europe
(CEE) raise concerns about these countries’ potential to maintain
competitiveness, tackle demographic and macroeconomic challenges, and catch
up with Western European economic and social standards. There is evidence
that unions in CEE continue to protect their members and generate wage
premiums, despite their institutional weaknesses.

When workers and firms cannot commit to
long-term contracts and capital investments are sunk, union power can reduce
investment

Although coverage of collective bargaining
agreements has been declining for decades in most countries, it is still
extensive, especially in non-Anglo-Saxon countries. Strong unions may
influence firms’ incentives to invest in capital, particularly in sectors
where capital investments are sunk (irreversible), as in research-intensive
sectors. Whether unions affect firms’ investment in capital depends on the
structure and coordination of bargaining, the preference of unions between
wages and employment, the quality of labor-management relations, and the
existence of social pacts, among other factors.

Negotiating work rules at the firm level instead
of the industry level could lead to productivity gains

Because theoretical arguments differ on the
economic impact of collective bargaining agreements in developing countries,
empirical studies are needed to provide greater clarity. Recent empirical
studies for some Latin American countries have examined whether industry- or
firm-level collective bargaining is more advantageous for productivity
growth. Although differences in labor market institutions and in coverage of
collective bargaining agreements limit the generalizability of the findings,
studies suggest that work rules may raise productivity when negotiated at
the firm level but may sometimes lower productivity when negotiated at the
industry level.

Workers can benefit from technology that
substitutes robots or other machines for their work by owning part of the
capital that replaces them

Robots, that is any sort of machinery from
computers to artificial intelligence programs that provides a good
substitute for work currently performed by humans, can increasingly replace
workers, even highly skilled professionals, and thus reduce opportunities
for good jobs and pay. But, with appropriate policies, the higher
productivity due to robots can improve worker well-being by raising incomes
and creating greater leisure for workers. Consider the way Google reduces
the need for reference librarians and research assistants, or the way
massive open online courses reduce the need for professors and lecturers.
How these new technologies affect worker well-being and inequality depends
on who owns them.

Extending provisions of collective contracts to all
workers in an industry or region may lead to employment losses

In many countries, the minimum wages and working
conditions set in collective bargaining contracts negotiated by a limited set of
employers and unions are subsequently extended to all the employees in an industry.
Those extensions ensure common working conditions within the industry, limit wage
inequality, and reduce gender wage gaps. However, several studies suggest that those
benefits come at the cost of reduced employment levels, especially during recessions.
The income losses of workers who are displaced because of a collective contract
extension can offset the wage gains among workers who keep their jobs.

What are the economic implications of union wage
bargaining for workers, firms, and society?

Despite declining bargaining power, unions
continue to generate a wage premium. Some feel collective bargaining has had
its day. Politicians on both sides of the Atlantic have recently called for
the removal of bargaining rights from workers in the name of wage and
employment flexibility, yet unions often work in tandem with employers for
mutual gain based on productivity growth. If this is where the premium
originates, then firms and workers benefit. Without unions bargaining
successfully to raise worker wages, income inequality would almost certainly
be higher than it is.